Investors often wonder how many stocks they should own and despite the fact that, we think, most people understand that just owning 1 or 2 stocks can be quite risky, we think that most investors would be surprised by the small number of holdings that are needed to provide significant diversification.
Before going any further, we would just like to make a fairly obvious statement on how many stocks to own:
* it pretty much depends on how much time you are willing to dedicate to keeping up with your portfolio
So, assuming that we all agree that it is wise to build up a diversified portfolio to balance the negative effects of a bad pick or a specific industry downturn, how many stocks are needed to avoid what is called ‘nonmarket risk’? Well, we think readers would be surprise to see the following figures:
* 2 stocks would eliminate 46% of nonmarket risk of just owning 1 stock
* 4 stocks would eliminate 72%
* 8 stocks would take the figure to 81%
* 16 stocks would free you from 93% of the risk
* 32 stocks would eliminate 96%
* and 500 stocks would eliminate 99%
What does the above mean for the average investor? It highlights the fact that if you focus on selecting and owning a diversified portfolio of between 8 and 16 stocks you can rest assured that you are more than adequately protected against nonmarket risk.
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